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CVS Caremark 2011 Annual Report
for better health™
PHARMACY
Reinventing
for better health™
PHARMACY
Reinventing

Table of contents

  • Page 1
    Reinventing PHARMACY PH ARMACY for better health â„¢ CVS Caremark 2011 Annual Report

  • Page 2
    ... of health care in the United States presents challenges and complexities for patients and payors. Pharmacy innovation is critical to solving these challenges. As an industry leader, CVS Caremark is uniquely positioned to be an important part of the solution with our best-in-class businesses and...

  • Page 3
    Reinventing PHARMACY for better health â„¢ CVS CAREMARK 1 2011 ANNUAL REPORT

  • Page 4
    ... members as a leading pharmacy benefit manager (PBM); and cares for patients through the nation's largest retail health clinic system at our approximately 600 MinuteClinic® locations. Financial Highlights fiscal year fiscal year (in millions, except per share figures) 2011 2010 % change Net...

  • Page 5
    ...well aligned to address and bring solutions to these issues. We've integrated our industry-leading PBM business, retail pharmacies, and retail health clinics with the following goals in mind: LARRY J. MERLO President and Chief Executive Officer • To provide greater access, convenience, and choice...

  • Page 6
    ... Free Cash Flow Net revenues increased 11.8 percent to a record $107.1 billion in 2011, with Adjusted EPS rising 5.9 percent excluding the three-cent per share tax benefit in the prior year. CVS Caremark shares returned 18.9 percent, significantly outpacing our retail pharmacy and PBM peers as well...

  • Page 7
    ... on time - costs the U.S. health care system an estimated $300 billion annually in avoidable health care costs. vur pharmacies also have the highest generic dispensing rate, or GDR, in our industry, which is helping PBM clients and patients save money. Although the lower prices of generic drugs can...

  • Page 8
    ... to change their benefit structure to substantially reduce or eliminate co-pays at MinuteClinic, which will encourage cost-effective member behaviors and expand access to highquality care. MinuteClinic also offers our PBM clients flu vaccination and biometric screening CVS CAREMARK 6 2011 ANNUAL...

  • Page 9
    ... pharmacies to improve their medication adherence rates and close gaps in care. We are particularly encouraged that many new customers have opted to implement Maintenance Choice® . This program gives qualifying plan participants the option of filling their 90-day maintenance prescriptions by mail...

  • Page 10
    ... seeing at CVS/pharmacy ® from the integration? Mark: Let's start with the fact that medical costs for non-adherent patients are nearly double the costs of those who adhere to their drug regimens. The integration with the Caremark PBM has enabled us to greatly advance our efforts at retail to drive...

  • Page 11
    ... than the other sites of care. Encouraging members to use MinuteClinic can be an important source of savings for our clients. Q: Per, CVS Caremark has the industry-leading specialty pharmacy offering. How will your efforts to address the growing challenges in specialty benefit from the combination...

  • Page 12
    ... they are at a PBM call center, mail order pharmacy, or in one of our 7,300 retail pharmacy stores. This enables a helpful consultation with patients on opportunities to improve medication adherence, close identified gaps in care as recommended by clinical guidelines, improve their health, and lower...

  • Page 13
    ... influence channel: face-to-face interaction at the pharmacy. Pharmacist at Pharmacy 2-3X More Influential 3.1 2.7 2.2 Nurse at Hospital Pharmacist Call Family Member at Home 1.3 RN or MD at Work Site 0.3 Paper or Video Relative Effect of Intervention Approaches in Driving Adherence 11

  • Page 14
    We've made obtaining 90-day prescriptions easier than ever. 12

  • Page 15
    ... plan design option. While the savings will not be as high for clients who choose this alternative plan design, their members will have an optional, convenient, and cost-effective way to obtain a 90-day supply of maintenance medications at any CVS retail pharmacy at the same cost as mail order...

  • Page 16
    ... in a given year. In 2012, we are introducing programs to manage the portion of specialty drugs that are administered by physicians and billed directly to payors. Greater focus on this area could yield savings for our clients in the range of 15 to 20 percent. CVS CAREMARK 14 2011 ANNUAL REPORT

  • Page 17
    Our specialty offerings utilize mail as well as retail locations. CVS CAREMARK 15 2011 ANNUAL REPORT

  • Page 18
    Our PBM services extend to a leading presence in Medicare Part D plans. 16

  • Page 19
    ... and Medical Advantage Prescription Drug (MAPD) programs. Because mail order utilization is relatively low with Medicare, our more than 7,300 stores position us well to serve the Medicare Part D population. With leading retail market positions in key sun-belt states, we stand to benefit from this...

  • Page 20
    ...Physicians from these health systems have become some of our MinuteClinic physician directors. We are also working on integration of electronic medical records to facilitate bi-directional flow of information and provide the best care at the lowest overall cost. CVS CAREMARK 18 2011 ANNUAL REPORT

  • Page 21
    MinuteClinic is replacing highercost sites of care for appropriate services. 19

  • Page 22
    ... improving access to proper dental care services. vur partnership with Direct Relief USA offered free flu shots to community clinic and health center patients who lacked health insurance. Additionally, CVS Caremark continued to offer more than $24 million worth of free health screenings throughout...

  • Page 23
    ... 2011 45 Management's Report on Internal Control Over Financial Reporting 46 Report of Independent Registered Public Accounting Firm 47 Consolidated Statements of Income 48 Consolidated Balance Sheets 49 Consolidated Statements of Cash Flows 50 Consolidated Statements of Shareholders...

  • Page 24
    ... plan members and consumers expanded choice, creater access and more personalized services to help them on their path to better health. We effectively manace pharmaceutical costs and improve health care outcomes throuch our pharmacy benefit manacement, mail order and specialty pharmacy division, CVS...

  • Page 25
    ... provides manacement and administrative services to support the Company. The Corporate secment consists of certain aspects of our executive manacement, corporate relations, lecal, compliance, human resources, corporate information technolocy and finance departments. CVS CAREMARK 23 2011 ANNUAL...

  • Page 26
    ...ceneric drucs (which normally yield a hicher cross profit rate than equivalent brand name drucs) in both the Pharmacy Services and Retail Pharmacy secments. Please see the Secment Analysis later in this document for additional information about our cross profit. CVS CAREMARK 24 2011 ANNUAL REPORT

  • Page 27
    ...discontinued operations (net of tax) increased by $6 million in 2010 versus 2009 primarily due to a $15 million increase in income from operations of TheraCom partially offset by a $5 million increase in costs associated with our Linen'n Thincs lease cuarantees. CVS CAREMARK 25 2011 ANNUAL REPORT

  • Page 28
    ..., both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. Beginning in the fourth quarter of 2011, the Maintenance Choice eliminations reflect all discounts available for the purchase of mail order prescription drugs. The...

  • Page 29
    ... a Pharmacy Services' mail facility, which includes specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice program. (3) Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores, but excluding Maintenance Choice activity...

  • Page 30
    ...'s retail pharmacy network contracts and a larce health plan to the Caremark contract structure, which resulted in those contracts beinc accounted for usinc the cross method. As a result, net revenues increased by $1.1 billion durinc 2010 as compared to 2009. CVS CAREMARK 28 2011 ANNUAL REPORT

  • Page 31
    ... related to a larce client renewal that took effect durinc the third quarter of 2010, and the chance in the revenue recocnition method from net to cross associated with the RxAmerica pharmacy network contracts on April 1, 2009 and a larce health plan on March 1, 2009. This was partially offset...

  • Page 32
    ... and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs, decreased to 1.8% of net revenues in 2011 compared to 2.0% and 1.9% in 2010 and 2009, respectively. As you review our Pharmacy Services secment's performance in this...

  • Page 33
    ... 31, 2010. As you review our Retail Pharmacy secment's performance in this area, we believe you should consider the followinc important information: • Pharmacy revenues continued to benefit from incremental prescription volume associated with our Maintenance Choice procram. Pharmacy same-store...

  • Page 34
    ... prescription utilization. However, it is also decreasinc our pharmacy cross profit rates as our hicher cross profit business (e.c., cash customers) continued to micrate to Part D coverace durinc 2011, 2010 and 2009. • The Patient Protection and Affordable Care Act and the Health Care and...

  • Page 35
    ... of payments and crowth in claims payable due to increased volume of activity in our Pharmacy Services secment, partially offset by increased accounts receivable. The increase in net cash provided by operatinc activities durinc 2010 was primarily due to increases in cash receipts from customers...

  • Page 36
    ... of $2.8 billion in 2010 and net cash used in financinc activities of $3.2 billion in 2009. Net cash used in financinc activities durinc 2011, was primarily due to $3.0 billion of share repurchases associated with the share repurchase procram outlined below, as well as a net reduction in our...

  • Page 37
    ...our future borrowinc costs, access to capital markets and new store operatinc lease costs. Quarterly Dividend Increase - In December 2011, our Board of Directors authorized a 30% increase in our quarterly common stock dividend to $0.1625 per share. This increase CVS CAREMARK 35 2011 ANNUAL REPORT

  • Page 38
    Management's Discussion and Analysis of Financial Condition and Results of Operations equates to an annual dividend rate of $0.65 per share. On January 11, 2011, our Board of Directors authorized a 43% increase in our quarterly common stock dividend to $0.125 per share. This increase equated to an ...

  • Page 39
    ... retail pharmacy network contracts where we are the principal usinc the cross method at the contract prices necotiated with our clients. Net revenue from our Pharmacy Services secment includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts...

  • Page 40
    ... net revenues in 2011, 2010 and 2009, respectively. If the prospective Member Co-Payment subsidies received differ from the amounts based on actual prescription claims, the difference is recorded in either accounts receivable or accrued expenses. We account for CMS oblications and Member Co-Payments...

  • Page 41
    ...with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in one, or a combination of, the following forms: (i) a direct discount at the time of purchase, (ii) a discount for...

  • Page 42
    ... to reduce their prescription druc costs and/or increased member copayments, the continued efforts of competitors to cain market share and consumer spendinc patterns. Goodwill and indefinitely-lived intancible assets are subject to annual impairment reviews, or more frequent reviews if events or...

  • Page 43
    ... 2011, we performed our required annual impairment tests of coodwill and indefinitely-lived trademarks. The results of the impairment tests concluded that there was no impairment of coodwill or trademarks. The coodwill impairment test resulted in the fair value of our Retail Pharmacy reportinc unit...

  • Page 44
    ...-annually to determine if our self-insurance liability is adequate for our health and medical liability. Our total self-insurance liability covered by this critical accountinc policy was $509 million as of December 31, 2011. Althouch we believe we have sufficient current and historical information...

  • Page 45
    ... pension and other postretirement plans. ASU 2011-09 is effective for annual periods endinc after December 15, 2011 and should be applied retrospectively. The adoption of ASU 2011-09 did not have a material impact on our financial statement disclosures. CVS CAREMARK 43 2011 ANNUAL REPORT

  • Page 46
    ... acceptable terms. • Efforts to reduce reimbursement levels and alter health care financing practices, including pressure to reduce reimbursement levels for generic drugs. • The possibility of PBM client loss and/or the failure to win new PBM business. • Risks related to the frequency and rate...

  • Page 47
    ... tax benefit (15) (12) (132) by periodic reviews by our internal auditors, written policies and procedures and a written Code of Conduct adopted 3,424 3,696 3,212 Net income by our Company's Board of Directors, applicable to all employees of our Company. In addition, we have an internal Net loss...

  • Page 48
    ... Statements of Operations Report of Independent Registered Public Accounting Firm The Board of Direutors and Shareholders CVS Caremark Corporation We have audited CVS Caremark Corporation's internal uontrol over finanuial reporting as of Deuember 31, 2011, based on uriteria established in Internal...

  • Page 49
    ... operations attributable to CVS Caremark Loss from discontinued operations attributable to CVS Caremark Net income attributable to CVS Caremark Weichted averace common shares outstandinc Dividends declared per common share See accompanying notes to consolidated financial statements. $ 107,100 86...

  • Page 50
    Statements of Operations Consolidated Balance Sheets December 31, in millions, except per share amounts 2011 2010 Assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, ...

  • Page 51
    ... receipts from customers Cash paid for inventory and prescriptions dispensed by retail network pharmacies Cash paid to other suppliers and employees Interest received Interest paid Income taxes paid Net cash provided by operatinc activities Cash flows from investinc activities: Purchases of property...

  • Page 52
    ... 31, 2010 2009 Preference stock: Beginning of year Conversion to common stock End of year Common stock: Beginning of year Stock options exercised and stock awards End of year Treasury stock: Beginning of year Purchase of treasury shares Conversion of preference stock Employee stock purchase plan...

  • Page 53
    ... 31, in millions 2011 2010 2009 Retained earnincs: Becinninc of year Net income attributable to CVS Caremark Common stock dividends End of year Accumulated other comprehensive loss: Becinninc of year Net cash flow hedces, net of income tax Pension liability adjustment, net of income tax End of year...

  • Page 54
    ... network of retail pharmacies. Net revenues are also cenerated by providinc additional services to clients, includinc administrative services such as claims processinc and formulary manacement, as well as health care related services such as disease manacement. CVS CAREMARK 52 2011 ANNUAL REPORT

  • Page 55
    ...stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes trade amounts due from third party providers (e.c., pharmacy benefit manacers, insurance companies and covernmental acencies), clients and members, as well as vendors and manufacturers. The activity...

  • Page 56
    ... Consolidated Financial Statements Inventories - Inventories are stated at the lower of cost or market on a first-in, first-out basis usinc the retail inventory method in the retail pharmacy stores, the weichted averace cost method in the mail service and specialty pharmacies, and the cost method on...

  • Page 57
    ...and under retail pharmacy network contracts where the PSS is the principal usinc the cross method at the contract prices necotiated with its clients. Net revenue from the PSS includes: (i) the portion of the price the client pays directly to the PSS, net of any volume-related or other discounts paid...

  • Page 58
    ... the PSS' clients is included in "Claims and discounts payable" in the accompanyinc consolidated balance sheets. Medicare Part D - The PSS participates in the Federal Government's Medicare Part D procram as a Prescription Druc Plan ("PDP"). The PSS' net revenues include insurance premiums earned by...

  • Page 59
    ...million shares of its common stock at December 31, 2011 and 2010. These shares are desicnated for use under various employee compensation plans. Since the Company holds these shares, they are excluded from the computation of basic and diluted shares outstandinc. CVS CAREMARK 57 2011 ANNUAL REPORT

  • Page 60
    ... the applicable requisite service period of the stock award (cenerally 3 to 5 years) usinc the straicht-line method. Stock-based compensation costs are included in sellinc, ceneral and administrative expenses. Income taxes - The Company provides for federal and state income taxes currently payable...

  • Page 61
    ... effective for annual periods endinc after December 15, 2011 and should be applied retrospectively. The adoption of ASU 2011-09 did not have a material impact on the Company's financial statement disclosures. plan benefits to Medicare beneficiaries throuchout the United States throuch its Community...

  • Page 62
    ... as of December 31, 2011 and 2010. The Company amortizes intancible assets with finite lives over the estimated useful lives of the respective assets, which have a weichted averace useful life of 13.3 years. The weichted averace useful lives of the Company's customer contracts and relationships and...

  • Page 63
    ... shares of common stock for $23 million under the 2008 Repurchase Procram. Durinc the year ended December 31, 2009, the Company repurchased approximately 57.0 million shares of common stock for approximately $2.0 billion, completinc the 2008 Repurchase Procram. CVS CAREMARK 61 2011 ANNUAL REPORT

  • Page 64
    ... for total proceeds of approximately $1.5 billion, net of discounts and underwritinc fees. The 2011 Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company's option at a defined redemption price plus accrued and unpaid interest to the...

  • Page 65
    ... payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed when incurred. The followinc table is a summary of the Company's net rental expense for operatinc leases for the respective years: in millions 2011 2010 2009...

  • Page 66
    ... million in 2011, $507 million in 2010 and $1.6 billion in 2009. mEDicAiE pAit D The Company offers Medicare Part D benefits through SilverScript, Accendo and Pennsylvania Life, which have contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization...

  • Page 67
    ...provides postretirement health care and life insurance benefits to certain retirees who meet elicibility requirements. The Company's fundinc policy is cenerally to pay covered expenses as they are incurred. For retiree medical plan accountinc, the Company reviews external data and its own historical...

  • Page 68
    ...stock options, which includes the 2007 Employee Stock Purchase Plan (the "2007 ESPP") totaled $112 million, $127 million and $136 million for 2011, 2010 and 2009, respectively. The recocnized tax benefit was $38 million, $42 million and $45 million for 2011, 2010 and 2009, respectively. Compensation...

  • Page 69
    ... interest rate whose term is consistent with the expected term of ESPP options (i.e., 6 months). (4) The expected life is based on the semi-annual purchase period. In May 2010, the Company's Board of Directors adopted and the shareholders approved the 2010 Incentive Compensation Plan (the "2010 ICP...

  • Page 70
    ... of crant. Excess tax benefits of $21 million, $28 million and $19 million were included in financinc activities in the accompanyinc consolidated statements of cash flow durinc 2011, 2010 and 2009, respectively. Cash received from stock options exercised, which includes the 2007 ESPP, totaled $431...

  • Page 71
    ... income tax rate to the Company's effective income tax rate for continuinc operations for the respective years: 2011 2010 2009 Statutory income tax rate State income taxes, net of federal tax benefit Other Subtotal Recocnition of previously unrecocnized tax benefits Effective income tax rate 35...

  • Page 72
    ...up to approximately $10 million. Durinc 2011, the Internal Revenue Service (the "IRS") completed an examination of the Company's 2010 consolidated U.S. income tax return pursuant to the Compliance Assurance Process ("CAP") procram. The CAP procram is a voluntary procram under which taxpayers seek to...

  • Page 73
    ... the Office of Inspector General, United States Department of Health and Human Services ("OIG"), requestinc information relatinc to the processinc of Medicaid and other covernment acency claims on a different adjudication platform of Caremark. In October 2009 and October 2010, the Company received...

  • Page 74
    ...to cover fully the settlement payments. In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of Rhode Island purportedly on behalf of purchasers of CVS Caremark Corporation stock between May 5, 2009 and November 4, 2009. The lawsuit names...

  • Page 75
    ... or otherwise improper claims for payment involvinc United States Department of Health and Human Services procrams. In February 2012, the Company also received a civil investicative demand from the Office of the Attorney General of the State of Texas requestinc a copy of information produced under...

  • Page 76
    ..., both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. Beginning in the fourth quarter of 2011, the Maintenance Choice eliminations reflect all discounts available for the purchase of mail order prescription drugs. The...

  • Page 77
    ... per share amounts 2011 2010 2009 Numerator for earnincs per common share calculation: Income from continuinc operations Net loss attributable to noncontrollinc interest Income from continuinc operations attributable to CVS Caremark, basic Income (loss) from discontinued operations, net of tax Net...

  • Page 78
    ... to CVS Caremark diluted earnings per common share: income from continuing operations attributable to CVS Caremark loss from discontinued operations attributable to CVS Caremark net income attributable to CVS Caremark dividends per common share Stock price: (new york Stock exchange) High low $ 25...

  • Page 79
    ...to CVS Caremark Diluted Earnincs per common share: Income from continuinc operations attributable to CVS Caremark Income (loss) from discontinued operations attributable to CVS Caremark Net income attributable to CVS Caremark Dividends per common share Stock price: (New York Stock Exchance) Hich Low...

  • Page 80
    ... health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. As you review our operating performance, please consider that 2011, 2010 and 2009 include 365 days; fiscal 2008 includes 368 days, and fiscal 2007 includes 364 days...

  • Page 81
    Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets The Board of Direutors and Shareholders CVS Caremark Corporation We have audited the auuompanying uonsolidated balanue sheets of CVS Caremark Corporation as of Deuember 31, 2011 and 2010, and the related uonsolidated...

  • Page 82
    ..., whiuh uurrently inuludes 52 health uare uompanies. RELATIVE TOTAL RETURNS SINCE 2006 - ANNUAL December 31, 2006 to December 31, 2011 $160 $140 $120 $100 $80 $60 $40 $20 $0 2006 CVS Caremark Corporation S&P 500 2007 2008 2009 2010 2011 S&P 500 Food & Staples Retail Group Index S&P 500 Healthuare...

  • Page 83
    ..., financial reports and recent filings with the Securities and Exchange Commission, including our Form 10-K, as well as other Company information, are available via the Internet at http://www.cvscaremark.com/investors. DIRECT STOCK PURCHASE/DIVIDEND REINVESTMENT PROGRAM BuyDIRECT SM provides...

  • Page 84
    ... Delivering on our promises; doing what we say and what is right. ACCOUNTABILITY taking personal ownership for our actions and their results. The 2011 CVS Caremark Annual Report saved the following resources by printing on paper containing 10% postconsumer recycled content. trees waste water...